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Used Games: Howard Beale Edition

For years video game platforms and publishers alike worshipped at the alter of the channel - victims of Stockholm Syndrome. We put up with extortive demands for MDF, price protection demands and shelving charges all because we can't piss off the channel. We acquiesce to uniform box size because it's what the channel wants. We make sure the box covers are not offensive because the channel demands it. We can't sell units on line at a discount because the channel will get angry. Most significantly, we can't distribute digitally because the channel will get angry. We take their abuse and delude ourselves into believing retail prices are not eroding even though channel charges continue to escalate. But with Amazon, Best Buy and Toys R Us announcing they are following Gamestop’s lead and getting into the used game business it is time for our Howard Beale Moment. While they think they are claiming a beachhead, we have the power to make it their Waterloo. As proven out by the music industry, shifts to online distribution are tsunamis, not rising tides. In a world of 30 some million connected consoles and hundreds of millions connected PC's the channel we can seize control and force them to cater to us. It is time for our industry to show them consumer loyalty lies with the content, not the retailer.

Even the movie business is crying revolution and they are a bunch of market fearing, research heavy, herd mentality, wanna be like the other guys, sunglass at night wearing, take my picture, babies. I’ve traveled among them and they are not half the warriors you are:

[p]erhaps, desperate times call for desperate measures; which might explain why 20th Century Fox Home Entertainment will start making two different versions of its DVDs: a stripped-down version for DVD rentals, and a premium version with extras for DVD sales.

Variety's Video Business reports that starting with the March 31 DVD releases of Marley and Me and Slumdog Millionaire, Fox will put this new strategy into place. The retail DVD SKU for Slumdog Millionaire will contain "special features including deleted scenes and commentaries;" while the rental DVD SKU will only have the movie and trailers. There will be variations on this theme depending on the particular title; for instance, the rental DVD and Blu-ray SKUs of Marley and Me will both include special features, but the retail Blu-ray version will be "a combo pack with a DVD movie and digital copy." . . . As to the justification behind this strategy, it is all about differentiation--making the retail version of the DVD movies appear that have more value than the rental version. This might increase the possibility that someone would buy a DVD instead of renting it, as well as possibly reducing the likelihood that previous-viewed DVDs can also cannibalize new DVD sales. Fox provided a statement to Video Business that stated:

"We have developed product variations to feed different consumer consumption models and behaviors... For rental customers, we're delivering a theatrical experience in the home while promoting upcoming releases; for retail [or sell-through] customers, we're offering a premium product that expands the entertainment experience of that particular property to further enhance ownership."

At the risk of mixing icons, stand up, step to your window, open it up, raise a fist in the air and yell with me:

"I AM MAD AS HELL AND I AM NOT GOING TO TAKE IT ANYMORE. LIBERTAD! LIBERTAD! LIBERTAD!"

I've written a lot about used games and there is no reason to get into it here again. Suffice it to say, no matter how many times our friends at Gamestop say it, repeating a lie will not make it the truth. The more they do it, the more the insult our intelligence. Because they continue to spread their used game propaganda and fail to realize they are biting the very hand that feeds them, they will be the first victims of the revolution. How dare they have the hubris to build nearly one half of their game software business on the sale of games they don’t pay for and tell us they are doing us a favor? Our revolution will change the way we connect with our customer and will send waves through every aspect of our business. It won't be pretty, and there will be carnage, but it must be done. Perhaps some innocent store managers and employees who really don't believe in the sale of used games will be caught in the carnage, and I am sorry, but collateral damage is a fact of war.

I want to be clear, I am not calling for destruction of the channel– it will still have value to us - we just have to show our solidarity by taking down the largest in a statement to all the others of what will happen if the continue down this course. Any one lacking confidence in our strength can try to pick up a CD at Tower Records, The Wherehouse, Sam Goody or half of the Virgin Megastores. If there is still any question, explain the difference to me between their bits and ours.

The game channel grew from the same fundamental inefficiency eliminated by the music industry, the delivery of the bits. Our respective channels made money through elimination of this inefficiency. In our case, and formerly in the music business, intermediaries delivered bit filled pieces of plastic to our consumers. They exacerbate the inefficiency, created further friction and sustained their place in the market by converting our customers to theirs - even though we are the ones bringing them in. No one goes to a store for the name on the door. They go to the store for the content we put on the shelves. When the need to deliver music bits on plastic went away, by fiat of their consumer, so did the retailers who added no value beyond aggregation. Music retailers did not die from illegal file sharing. They died from a lack of value. content controlled. In contrast, added value retailers survived and quite painfully another a third party intermediary stepped in to once again extract its tithe from the music creators.

I draw the line between Walmart/Target/Bestbuy and Apple/Amazon. The market has fundamentally changed but the former builds the artist while the latter builds their audience. One adds value to the artists, the other, to themselves. WTB realized their music business was going away. It was no longer good enough to just add real estate and diesel fuel. They had to add value to the bits to get consumers to come to them rather than download. After some exploration, they discovered the point of maximum leverage for their investment is at the artist level. By promoting the artist the way the music label used to do, they were able to drive traffic into the store and move units. The store is no longer fungible with all other stores. They now have a USP. The artists benefit from a marketing program well beyond those received from music labels, and their name is promoted along side the store. Did you see the wacky thing there? Rather than collecting MDF and channel fees, WTB actually paid money to the content and in these cases, directly to the artist, a very clear value add. Before you argue these deals are limited only to the upper echelons of the business, realize only the upper echelon still receive investment in promotion and development from the labels. Which developers are commanding publisher deals now? Even though WTB are acting in their own interest, there is a net value add to the artists. As much as it pains me to take an adverse position to my dear Apple, this is simply not the case with the on line retailers, and especially the largest.

Apple promotes the freedom of the artist, but they don't promote the artist. iTunes attracts consumers through the same aggregation as the extinct physical retailers, and provides the artist with only a substitute for the record label - without the advance and music video money. The complaint about labels and the channel was they made all the money and paid the artists only a pittance. In an inverse Gillette business model, Apple collects all of the money on the sale of the razors and gives the blades away for free. Likewise, Amazon and other on line players without hardware made money only on the aggregate sale of music, with no individual artist ever doing very well.

The lesson to be learned is we have value. We can fall prey to a short term appeal of an aggregator providing a ready made audience we can build their brand while providing our content for free, or we can command value from the channel commensurate with the value of our content. If we don’t take action, the channel will make the determination for us.

Ok, you waded through the inner recesses of my mind to get to the revolution part. If you are still with me, let’s talk about our attack on Gamestop. I called for a boycott once before because they are the most vulnerable. The Gamestop customer is the hardcore gamer who wants a wide selection and their game on the day it comes out. This is also the gamer who has a broadband connection to one or more consoles in their home. Gamestop’s most painful impact occurs with the purchase of used games at only a 10% discount within weeks of release. It is their smallest discount level, but it is given when they ordinarily reorder. The first tier or gamers rush through their game so they can get them back to the store and receive maximum value, creating enough inventory to avoid reorders, decreasing the supply of games in the channel. However, if we make games available directly to the hardcore at or near launch, there will be no incentive to drive to the store to buy the used game. Sure we will hurt our Gamestop orders, but sales follow the path of least resistance. Most will buy on line, others will simply purchase at WTB, driving reorders in the short term and increased sales in the long term. Even at a 10% or greater discount, the publisher can generate a greater profit than selling through Gamestop.

The beauty of the attack lies in its surgical nature. We are stepping on the accelerator for direct distribution, but we are not fighting on multiple fronts. The WTB buyer is more opportunistic. While there is some overlap with Gamestop, they are largely outside the hardcore. These are the folks who require us to buy network television ads to reach them. Games are significant to them, but their consumers are in the store for other reasons. They pick up a game while they are their to pick up milk and deodorant – well- maybe Mountain Dew and not deodorant. This is why WTB is still in the retail music business and dedicated stores are all gone. We can even make them our allies by providing added value download for physical units purchased at WTB. Of course WTB would pay for those and co market. Who knows, maybe they will even pay developers directly . . . SHHHHHH don’t tell.

Once we get to the other side, we will realize the USD 59.95 price point, and even the USD 49.95 were not carved in stone by the finger of the almighty. They are an industry created construct, which continues to drive us to make USD 20 million “Fields of Dreams.” In this insidious cycle, the consumer demands a certain amount of gameplay for their dollar and we supply it. Perhaps in this new world we will be able to build games of all sizes at various price points. Without inventory we can shift prices up and down and all around until we determine the proper price for each type of game. Really, Gabe Newell says its ok. We can take risks again. New mechanics and gameplay can be released in smaller versions or even to limited large scale beta groups to see if we are on the right track before putting in the second USD 15 to 17 million. We can even capture the long tail currently exploited by Gamestop in their bargain bin.

I don’t know if I’ve seen the future or if the revolution will even happen in time to rescue the industry as we know it. I do know we can’t be so ignorant as to believe we are immune to the reconfiguration of the markets for every other form of media. If we don’t choose to be proactive in the change, it will be done for us and we won’t be happy.

Comments

Perhaps I am naive, but would a 10% discount be enough to compensate the customer for the fact they can't sell their purchase on anymore? When I buy music, I intend to listen to it for years to come. With a few exceptions, once a game is done, I am unlikely to pick it up and play it again. It makes more sense to sell it on to someone else. Or lend it out. Or even rent in the first place.

What i am trying to get at here is that a physical copy still has significantly more value than a download. Finally, even if i wanted to keep the game and play it for years, a downloaded copy may become unplayable (especially if burdened with DRM, copy protection and online activation as PC games tend to be).

To the first point, I chose 10% because it is what is being offered now. The sales follow the path of least resistance, or in this case, price friction. Gamestop offers a 10% discount and grabs sales. They lower it when they have to, and we can do the same. The beauty of on line sales, is if 10% doesn't work, we can lower it more without stocking issues.

As far as your desire to keep the game, that's wonderful. That is why the Walmart/Target/Best Buy channel will survive. There are some people who will want to keep every game and there some games everyone will want to keep. Just like music, those stores adding value to our content and the consumer in general, will survive.

To say the channels have little power doesn't sound right to me. I've read plenty about how Wal-Mart controls the distributors and how the power of the retailer has increased over time. Only in rare cases can a brand/developer/publisher dictate the rules. Many games are being commoditised today, and unless you're Blizzard, you won't have much weight.

Digital distribution is already underway with leaders such as Steam (Gabe Newell), Xbox Live, PSN, and App Store. I believe that the price of the products is too high to justify a locked down digital distribution model. One solution would be to move to a subscription model, where users pay for a title and they receive content as it's being developed. This allows developers to launch a product after level 1 is completed. If people like it, they can subscribe for a small monthly fee ($5) and receive updates over a fixed time period. Just a thought.

The current model, including used games gives the gamer choice. This is part of why it works. If the gamer is "hardcore" and wants to purchase the game at launch for full price, they can do so and still be left with choice: keep it or sell it immediately (for a 75% return or more). If they keep it, they know it will sell for less over time but can still do so at any point for some return of their money. Those that choose not to purchase at launch know that they will be able to get it for less once used copies become available and, depending on how long they wait, may be able to acquire a game for nearly 1/4 of the original sale price.

With digital distribution, NONE of these are choices. The gamer can never resell the game, has no guarantee of keeping it forever, and has no reasonable expectation that it will ever cost less.

The reason digital distribution caught on so quickly for music is that the majority of music purchasers buy music with the idea of keeping it forever. That's not the case with gamers. Your revolution will be a bumpy one not because of the channels but because of the audience.

First, you assuming used games are not sold immediately. Unfortunately, they are. Sometimes within the first week. These sales lead to reduced re orders, with subsequent returns eating to classics sales and library value. Those games selling at USD 19.99 represent the library value of the games to the publisher, but the publishers aren't getting the money. I am only addressing institutionalized resale. If you want to sell your game after you play, you can still put it up on ebay. You will actually get more money today, and more money in the future if retailers are not selling games used.

As far as pricing choices, you are assuming a rigid pricing and product structure. Today we have one price and one product because it is expensive to put variation in the channel. If we could adjust prices and "manufacture" to order via download, consumers could be offered various versions at a variety of prices.

Why not offer a premium version of the product and a standard version for cheaper at the same time? The premium version would have access to DLC and updates baked into the price with a special product code for the hardcore, first day buyers. The "Lite" version would have all the same gameplay and multi-player functions, but in order to obtain further DLC gamers would need to pay preium download fees. The premium consumer would be getting a discount and Gamestop would be getting hit where they eat with publishers targeting the same demographic of gamer that buys brand new "used" games in the first month of launch. This also can build longer brand equity for premium buyers as they wouldn't want to resell their copies without getting maximum return on their initial investment thus driving down reselling to Gamestop. Those unsure of the value of the DLC would get a taste at a lower price, driving unit sales and undercutting Gamestops ability to resell used games. Publishers can't wish away used game sales and digital distribution is not a panacea. Let's get on the side of gamers and give them a reason to be loyal to the creators. Thoughts?

As an added note to pricing, downloadable games, and "secondhandness" - Microsoft has (recently?) started to hand out price reductions of up to 30% on downloadable games on the XBOX LIVE network. but ONLY if you are a Gold member. These are games (such as Braid) not available through any other channel and that have been available for some time. I think it is pretty clear whether this is to promote a single title, or to boost sales of gold membership.

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